Pension FAQs

Pensions overview

Are there any rules in place restricting how much I can save in my pension pot?

Pension options

What options do I now have in retirement?

Are there any stipulations in the new pension freedom reforms?

Are annuities really the ‘safest’ option?

Are there any alternatives to a traditional pension?

Is there capacity for wealth accumulation in retirement?

Pension tax

How am I taxed on my pension?

For example, if I have a pension pot of £100,000 that I want to draw down, how much would I be expected to pay in income tax?

Pension guidance and advice

Can I leave an inheritance to my loved ones from my pension pot?

Where can I go if I need advice on how to best utilise my pension?

What is the State Pension age?

The current state pension age is 65 for men (born before 6 December 1953), and between 60-65 for women (born after 5 April 1950 and before 6 December 1953).

However, the State Pension age for women is expected to increase to 65 by November 2018, before gradually increasing for both men and women to reach 66 by October 2020.

How do I find out exactly what is in my pension pot?

If you have several pension pots (including several workplace pensions from your various places of employment across your working life) there are several free resources that will help you gain a realistic projection of how much you will be expected to receive upon your retirement.

The Government have a useful facility called the Pension Tracing Service, which helps policyholders trace any workplace pensions they may have in their name. In addition, the Pension Calculator, hosted by the Money Advice Service, is an interactive calculator that provides an estimate of both your State and personal pension entitlements based on your personal circumstances.

Are there any rules in place restricting how much I can save in my pension pot?

No, you can save as much as you like throughout your life with no restriction. However, the Lifetime Allowance exists as a limit on the amount of pension funds withdrawn in one tax year that, if exceeded, can trigger an extra tax charge. This Allowance has been announced as £1.25m for the tax year 2015-16, and applies to all pensions you have (excluding your State Pension entitlements).

What options do I now have in retirement?

As of April 2015, the pension landscape in the UK has changed. Then-Chancellor George Osborne announced that the 2016 tax year will see pensioners or those nearing retirement age to have more control than ever before over their retirement finances.

There are 3 main choices with your retirement income:

Annuities — an annuity is a form of insurance whereby the retiree trades all or a portion of their pension for a fixed income paid each month, and is guaranteed until the policyholder’s death. Whilst once annuities were mandatory, the Government have now lifted the obligation for retirees to annuitize some or all of their pension pot, but people can still trade their pensions for annuities if they prefer the safety and stability of guaranteed income for the duration of their retirement.

Drawdowns — only applicable on a Defined Contribution (DC) pension, drawdowns allow those aged 55 and over to access their retirement funds more flexibly than annuities. There are two main types of drawdown: a capped and a flexible drawdown. As the name suggests, a capped drawdown limits the amount of your pension pot you can ‘draw down’, with the maximum income available being 150% of the amount you would have received each year if you’d bought an annuity, while the rest of the funds remain invested. However, flexible drawdowns allow over 55s to draw down as much money as they want each year without limit. However, because it is seen as a riskier strategy, a flexible drawdown is only available to those receiving a pension income of at least £12,000 a year from other sources.

Cash lump sum — not one for the cautious, it is now an option for those aged 55+ to have access to their pension pot as a cash lump sum, with the first 25% available tax-free. However, the remaining funds will be taxed at the policyholder’s marginal rate of tax, but the lump sum may push them into a higher tax bracket.

Retirees can also use a mix-and-match approach, using portions of their pensions for each option. Whilst annuities are a fixed amount paid to the policyholder each month, with the drawdown options you are free to use the money however you want. This is a popular method for retirees to fund alternative investments to accumulate wealth, like buy-to-let property.

Are there any stipulations in the new pension freedom reforms?

Whilst for the most part these new pension changes promote financial freedom in retirement, the then-Chancellor George Osborne added a stipulation that the new drawdown and lump-sum pension facilities are only available to those with a pension pot larger than £20,000 to ensure sensible financial management.

Are annuities really the ‘safest’ option?

Historically, annuities have been considered a safe option because they guarantee income for the duration of your life in retirement. Annuities were mandatory for retirees in the pension landscape before April 2015 because of the fixed income guarantee, with the Government believing that this was the best and most safe option for retirees to ensure they had enough money to see them through their retirement.

However, post-April 2015, the pension landscape in the UK is very different. While you can still buy annuities with all or some of your pension pot, it is no longer compulsory to do so, with more flexible schemes including flexible and fixed drawdowns. Those in or nearing retirement age now have a choice of how to spend their retirement funds, benefitting now from the flexibility of diversifying their pension pot.

Is there capacity for wealth accumulation in retirement?

If you have an annuity, your investment is kept by an independent insurance company who swaps your pension pot for a fixed income stream, paid in frequent instalments and is fully protected. While this means you are never in danger of losing your initial investment, the flipside of this means that there is no scope to increase your wealth either—the amount you initially invest is the amount you will receive in retirement (less the tax payable on the income payments when you receive them).

However, with drawdowns your pension is invested into funds (known as gilts), and as with any investment there is the potential to significantly increase your funds through investment growth. This means that any funds that remain in the pension pot after any withdrawals do have the capacity to grow—but they also have the capacity to be reduced too.

Of course, there are other ways you can make money in retirement. Given the incredible success of buy-to-let in the past decade, many retirees have been cashing in their pension pots and investing the money in property—like annuities this offers a fixed income every month from rental returns, and has the capacity to grow in value and provide a cash lump sum when the time comes to sell the property thanks to capital appreciation. However, if you choose to use property as your sole source of income in retirement, you should be savvy with your financial planning, accounting for things like void periods and due maintenance in the property. Industry experts recommend saving between 2-3 months of rental income to account for these incidentals, but remember that this could have a bearing on how much income you have each month.

Are there any alternatives to a traditional pension?

Thanks to the new drawdown and lump-sum options available, there are now lots of alternatives to traditional pensions. Recently, the most popular and widely-publicised is buy-to-let properties, as many pre-retirees are taking advantage of the drawdown option to take some of their fund to invest in property. However, it is always advisable to speak to an independent financial advisor before drawing down any pension funds.

How am I taxed on my pension?

As defined by the Government, your income includes the State Pension, private pensions (workplace, personal and stakeholder), employment earnings (salaries, bonuses etc.), taxable benefits, and any other income from investments or savings.

Pooled together, the income you receive from your pension is treated like a salary, which is subject to income tax—basic (20%), higher rate (40%) or additional rate (45%)—although you no longer have to make any National Insurance contributions on your pension. The amount of income tax payable depends on your gross taxable income, which is the amount of income less the standard personal allowance (which, in the tax year 2016-17, is £11,000).

All income exceeding this amount is liable for income tax, and is applied using your individual tax code. Your pension provider will deduct any due tax from any state and private pension contributions before they pay you and, much like during employment, at the end of the tax year you will receive a P60 from your pension provider showing how much tax you have paid. However, if you have no other income other than the basic State Pension, you don’t pay tax on this amount.

If you continue to work past retirement age, or decide to use your pension early, you will be taxed by your employer on both your earnings and your State Pension allocation through the Pay As You Earn (PAYE) tax code system. This sees your tax-free allowance reduced by the amount of State Pension income you receive, ensuring you pay a fair amount of tax. However, if your total income is £100,000 or more (or if you are self-employed), you must fill out a Self-Assessment Tax Return at the end of the tax year, declaring your overall income, including any State Pension and private pension income.

For example, if I have a pension pot of £100,000 that I want to draw down, how much would I be expected to pay in income tax?

With a £100,000 pension pot you can withdraw 25% of the total amount tax-free (£25,000). The remaining £75,000 however is subject to income tax, which is calculated on a slab rate. (Please note that the below is for illustrative purposes only, and may not reflect your personal circumstances).

Taxable amount = £75,000
Income between £11,000—£43,000 (£32,000) charged at 20% = £25,600 (£6,400 tax due)
Income between £43,000—£75,000 (£32,000) charged at 40% = £19,200 (£12,800 tax due)
At the current time, a pension pot of £100,000 is worth £80,800 after tax, meaning that the tax bill on this pension is £19,200.

However, the personal allowance tax threshold is due to rise to £11,500 on 6th April 2017, and the higher tax rate threshold will rise to £45,000 on the same day, which would affect all tax due. Furthermore, please note that your State Pension and other personal pensions all count towards your total income figure, and are liable to be included in the same income tax slab system when calculating how much tax you are due to pay on your pension.

For more detailed advice on tax and your pension, seek the advice of either a specialist accountant or financial adviser.

Can I leave an inheritance to my loved ones from my pension pot?

It depends entirely on your personal circumstances and which pension option you have chosen. As a general rule of thumb though you cannot leave an inheritance if your entire pension is tied up in annuities—in exchange for a guaranteed income even if you exceed your life expectancy, a standard annuity is a legally binding agreement that stipulates that the insurance company absorbs the remaining funds upon your death, even if you don’t reach the life expectancy stated by the annuity provider (unless you purchase an additional clause to allow inheritable funds, but this comes at an additional and often significant cost).

However, with drawdowns, this can be inherited to beneficiaries upon the death of the policy-holder, but whether the fund is inherited tax-free or at a marginal rate of tax depends on the age of the policy-holder upon their death and other factors. For more detailed advice on pensions and inheritance, it is advisable to speak to a specialist financial adviser for more personal advice relative to your individual circumstances.

Where can I go if I need advice on how to best utilise my pension?

Because of the newfound flexibility that those nearing retirement age now face, the Government has unveiled comprehensive plans to offer free and impartial pension guidance to those nearing retirement age. As well as Pension Wise, a dedicated Government-funded website, there are also plans in place to incorporate the Citizens’ Advice Bureau and the Pensions Advisory Service among others to offer financial guidance to UK citizens regarding their pension choices.

However, it must be noted that there is a difference between guidance and advice—these free Governmental services are to provide direction only, outlining all available options and the pros and cons of each option. If you are seeking more comprehensive and personal advice, you will need to enlist the help of an independent financial adviser, who will be better placed to understand your individual circumstances and make specific and professional recommendations.